The aging Estonia and Europe need to accept that the state has to earn and save before it can spend and must remain within its limits both financially and functionally, writes Jürgen Ligi, the Minister of Finance.
Right now, large English language news channels could bear the common name ‘eurozone crisis’ and they could all be merged. All their attention is directed towards the crisis and the keyword with which it all starts and ends is the euro. Especially in the English speaking world, in the dollar and pound zone, images have been created of the collapse of the European common currency and its region, and of an infection spreading across the world.
Myths help people live and may be useful, for example in order to put pressure on governments or the opposite – to direct attention away from oneself. But there are also benefits in comparing them to reality. The eurozone does not deserve the title role of the crisis – it has neither started nor caused it in a greater extent than the US, the rest of the EU or Japan. The crisis started in 2008 when the financial bubble in the US burst and the debts, which should really be referred to when naming the crisis, are a problem everywhere. This actually indicates excessive financial amplification in the public and the private sector while both were living beyond their means in general.
Currently, financial affairs, debts and deficits of states are at the centre of the crisis, hindering the whole economy due to the lack of trust – undermining consumer confidence, assets, banks’ balance sheets and loan activities. Still, there is also reason to talk about a crisis of democracy.
Talk of a competitive crisis is useless as regardless of one’s strength, they can only spend correspondingly. The competitiveness of the eurozone is measured by a high ranking in international labour division in terms of added value. This may vary from one country to another but there are also great differences between the US states, Estonian counties or districts of Tallinn without anyone talking about the collapse of a currency. Europe needs to select expenses more carefully instead of adding them and needs to make social systems more purposeful, remove competitive restrictions, liberalise the labour market, contain salary costs, facilitate privatisation, and develop the common market.
Markets and ratings have become the disciplining factors for governments in the debt crisis but this does not mean that they are accurate, did not miss the bubble or that they distinguish states fairly. For this purpose, I present a few facts to compare large market economies. The debt of the EU and the eurozone compared to GDP ranges from six per cent in Estonia to 160 per cent in Greece and the average is quite close to the middle of these two extremes.
In the US, the same indicator is about to exceed one hundred per cent and for Japan it is already over 200 per cent. The budget deficit of the US exceeds ten per cent while in the eurozone it is four per cent. The exchange rate of the euro is steadier than that of the dollar but economic growths are essentially the same. Unlike the US, the eurozone is not dependent on foreign money and in terms of export it rather shows a surplus than a deficit.
Even though the decision making process in Europe is a lot more complicated than it is for the president of the US, it is here, especially in the eurozone, where within a year decisions have been made forcing governments to reduce deficits and public debt and to balance the economy. Still, the fact is that Europe is suffering the most from the lack of trust and governments must convince both the markets and the Central Bank of their liquidity. The reason for this lies in individual states, primarily Greece, in apparent parallels and actual relations. Ireland and Portugal could not overcome the crisis which makes protection of others even more critical.
The price of living in debt in the eurozone is almost three per cent of GDP in interest costs, the constant renewal and taking of additional loans, but at a greater cost because of the lack of trust. But the state should not assume risks and debt – public services and government expenses are a constant cost flow which should be covered by collected taxes.
There should be reserves for the additional problems arising during a crisis not a need for loans, which was unfortunately enabled by the lax budget regulations in Europe paired with even more lax compliance with these rules. If there is faith, it is reasonable to try to further the economy with government spending but only from reserves while carefully selecting which expenses to make. The cost patterns that have already increased the debt must not be conserved in massive amounts of money, neither by loan nor by printing money, which has been the practice in countries where the central banks are more dependent. States’ balance sheets further confirm that automatic increases in expenses, which in Europe have been programmed to separate the citizen from the reality of the economic situation, are not a viable solution.
Also, the democracy which enabled such suicidal levels of spending and debt and has resulted in such a slow correction of mistakes must be critically evaluated and improved by independent analyses and sanctions.
Free benefits, tax exceptions, indiscriminate welfare services, restrictions on competition or indexed salaries have been required from and provided by the politicians. “Rights”, “interests”, and social standards provided in regulations correspond with neither the tax payer’s contribution nor realistic perspectives. Nonviable institutions, schools, hospital or rescue commands are not dissolved even if there is an obvious need to ensure quality. Extortion by interest groups can be considered a tradition.
And thus the overpaid state employees in Greece go on strike against cutbacks even in a situation where their country is in deep shame and insolvent, French train conductors stop their trains when an ash cloud closes the airspace and serious salary demands are made in Finland even in the worst recession. At the same time, economic analyses reveal the differences in states’ competitiveness with charts comparing salaries per products: Germany as an effective manager of this ratio is an example for other states – surprise-surprise – just as it is an example of cheap loans for others who borrow at an increasingly high interest rate.
The direct or economic threat to democracy is the possibility that extremist who present simple solutions gain power. On the other hand it could lead to the victory of responsibility and common sense that the state is nothing but a means of organising citizens for the purpose of jointly, for their own money, doing things that cannot be effectively done alone.
Citizens cannot have rights which exceed their total contribution but this contribution must be divided more efficiently. The key to the solution of the debt crisis is in the hands of the states and the people who enjoy the world’s best welfare. The touchstone of democracy is whether they can voluntarily make some concessions in it.
How does the debt crisis affect Estonia and its choices? Being free from the shackles of debt, our country is not dependent on the productivity of the government bonds market and this productivity is not dependent on us. Still, Europe shall remain our home and its well-being, even if there are doubts when it comes to solidarity, is important to us in terms of security, geopolitical affiliation and the economic environment which affects our well-being.
Europe is our primary market and we have managed to pull ourselves out of the crisis more clearly than others through export. Our banks are doing well but investments and interest rates are still dependent on Europe. The two-level rise in the state rating in the summer was exceptional but we are still vulnerable, undervalued and under special observation with the eurozone.
We hear sneers about our situation and about joining the eurozone. It seems that some expect the government to show some regret or apologize for not knowing or not providing information about problems. But we have been discussing European debt all the time, and not in the sense that the future is all clear skies. We have said that the euro is the only right choice for both a small country and Europe regardless of the aforementioned.
The eight per cent of economic growth and increased activity when the message of adopting the euro was released in conjunction make it absurd to claim that the euro has not changed our economy. Even more important than convenience and cost savings (about 0.2 per cent of GDP annually – calculated savings on transaction costs) in this case are trust and stability provided by the common currency compared to our small economy.
Furthermore, the euro had an invaluable unifying effect during harsh cutbacks. “For the euro” was the stimulus many needed instead of the government’s assurance that these decisions needed to be made for the benefit of Estonia’s financial affairs and competitiveness.
Nothing is guaranteed for us in the future, just like nothing has been guaranteed for us in the past. Only a few manage to maintain financial discipline and ideas of large loans for “development” or even “national loans” are always present in political discussions. It was only ten years ago when the Minister of Finance needed to remind the right-wing mayor of Tallinn, that the grandiose “reconditioning” of the capital with a loan is not a viable plan by giving him a crowbar as a gift, which is a symbol of lending in financial lingo.
The aging Estonia and Europe need to accept that the state has to earn and save some of their earnings before it can spend. The state must remain within its limits both financially and functionally – support to citizens must correspond to actual needs and be dependent on being more efficient than private initiatives. The right things must be demanded from politicians during elections – not new politics, faces or beginnings but rather basic truths which ensure the people’s well being and a better future.